Exit Strategies

Often, we don’t think of the exit when we are focused on starting up, but it could be something worth considering depending on your client’s circumstances. Find out what the entrepreneur’s goals are. Do they want to reach a certain financial target and then sell the company? Do they want to ultimately go public? Do they want to run the company until they retire? Do they foresee a family member taking over?

If the entrepreneur foresees holding ownership in the company for 5 years or more, and the entity used is a C-Corp, they will be able to sell their stock and escape paying capital gains. See, 26 USC § 11.

If a merger is anticipated, a corporate form will be a better form so that one can structure the future merger as a tax-free reorganization.

If an entrepreneur foresees going public, then a C-Corp will likely be required. Venture Capitalists traditionally have preferred C-Corps as well with the idea that they understand corporate law but also with the idea that their exit will be through a public offering or merger.

If the entrepreneur wants to retire with the company or pass along to family members, a pass through entity works well.

One can convert from one entity structure to another if necessary. This can be very costly and difficult from an accounting standpoint if you are converting a pass through to a C-Corp. It can also be time consuming.

While there are many more tax implications, the above provides a decent overview.